According to the minutes of the Board of the Brazilian Securities Comission (CVM) meeting, which were published on May 17, 2022, the CVM Board ruled the request for reconsideration of its previous December 21, 2021 ruling (“Appealed Ruling”), that was presented by BTG Pactual Serviços Financeiros S.A. DTVM (“BTG” or “Appellant”), as the administrator of Maxi Renda Fundo de Investimento Imobiliário. (“Fund”).
The Appealed Ruling had partially granted an appeal submitted by BTG against the interpretation of the Superintendency for Supervision of Securitization (SSE) that the earnings of the Fund could only be distributed to the investors upon the existence of accounting profits (in the same year or accrued from past years) (SEI Proceeding no. 19957.006102/2020-10).
In this respect, the Appellant, based on Art. 10, sole paragraph, of Law 8,668/1993, had been distributing to the investors, as earnings, amounts calculated based on the cash accounting basis, even when such amounts exceeded those recognized for accounting purposes as profits for the year and/or accrued from past years. As a result, the “excess amount” distributed increased the cumulative losses of the Fund in recurring form.
Through the Appealed Ruling, the CVM Board established that the Appellant could distribute those amounts to the Fund’s investors. However, it also determined that the distribution of income greater than the accounting amounts ascertained for the year or accrued from past years could not be classified in the financial statements as “earnings”, but instead as “amortization of shares” or “return of capital to the investors”.
In this context, on January 27, 2022, the CVM disclosed a note stating that the Appealed Ruling “involved a specific case, but the interpretation expressed therein can apply to the other real estate investment funds that have similar characteristics to those in the case analyzed.”
In its request for reconsideration, the Appellant indicated that the new accounting classification determined in the Appealed Ruling “brings not only legal risks, but also operational, financial, governance, liquidity management, and even tax implications, in the context of a distribution of earnings/equity”.
In analyzing the request for reconsideration formulated by the Appellant, the CVM Board unanimously reconsidered the Appealed Ruling, recognizing the regularity of classifying the distribution of “excess cash profits” as “accrued losses/profits”, rather than amortization of paid-up shares or return of capital.
The CVM President Marcelo Barbosa and Director Flávia Perlingeiro pointed out that the core of the controversy is the gap in the sole paragraph of Article 10 of Law 8,668/1993, which “employs imprecise terminology, with potential to generate significantly distinct treatments” when referring to “profits generated, as ascertained according to the cash accounting regime, based on a balance sheet or semi-annual trial balance sheet,” without clearly indicating how the distribution of these “cash profits” should be treated for accounting purposes.
Additionally, the CVM Board also advised the Appellant to present more information in the Fund’s financial statements, to clarify to investors that the portion of the distribution of “excess cash profits” can be greater than the accounting profits in some cases.
The CVM Board indicated that the information improvement could be accomplished by creating sub-accounts in the net equity line related to “accrued profits/losses”, segregating the distribution of profits that corresponded to accounting profits distributed and the distribution of “excess cash profits” (if any) based on Law 8,668/1993, with a corresponding explanatory note regarding those amounts.
Furthermore, the CVM Board reported that the administrator of the Fund must provide more details in this respect in the bulletins or reports sent to the investors, including clarifications about the risks involved.
Finally, the CVM Board members expressed the position that this information question should be placed on the Commission’s regulatory agenda for the purpose of standardizing and improving the rules applicable to investment funds, as part of the general revision of CVM Instruction 516/2011.
More information, as well as the full texts of the decisions by the CVM Board in SEI Proceeding no. 19957.006102/2020-10, can be found at the CVM’s website (www.gov.br/cvm).
